Accepted Papers

Session A01. Housing

Sanghoon Lee* (University of British Columbia), Tsur Somerville (University of British Columbia)

Lemon in Real Estate: Do People Believe Repairs?

This paper studies the impact of information asymmetry on repair decisions in housing market. Buyers cannot directly observe the true quality of a housing unit and thus try to infer the quality through various signals. One of the signals is a repair history but when a unit receives a repair it delivers somewhat conflicting information. First, it reveals that the unit had a problem. Second, it shows that the problem is now alleviated. Thus, the market price can move in either direction and this market price effect in turn affects owners’ repair decisions. We provide a theoretical model and test its implications using transaction data on leaky condominiums in Vancouver.
The model shows that the price effect of a repair depends on two parameters. First, as the percentage of defective units in the market increases, repair units are more likely to have higher prices relative to unrepaired units. For example, if all units are defective, repaired units must have better quality than the unrepaired. On the other hand, if few units are defective, a repair will just reveal that that particular unit had the problem. Second, as repairs are more effective, the repair tends to raise price more. For example, if a repair solves a problem completely, a repair will raise the price; buyers do not care whether the unit originally had the problem or not.
We use condominium transaction data in Vancouver to examine the theoretical implications. The leaky condo became a serious problem in Vancouver in 1980s after the government implemented air-tight building requirement. (The air-tight design prevented water in walls from drying.) The leaking probability varies across buildings by their structure types and vintage; wooden frame buildings built in 70s and 80s had more leaking problem than concrete buildings built in other times. We use this variation to examine the first implication. Currently we are still trying to find out how to examine the second implication.

The current debate about how governments should respond to the mortgage foreclosure crisis requires sound estimates about how foreclosures affect surrounding property values. Unfortunately, the few studies that have examined whether foreclosures adversely affect neighboring property values have been unable to address the critical question of causality – they cannot clarify whether foreclosures drive down surrounding home prices or whether the problems lower-value neighborhoods face make them more vulnerable to foreclosures. In this paper, we use a unique dataset on property sales and foreclosure filings in New York City from 2000 to 2005 to identify the effects of foreclosure starts on housing prices in the surrounding neighborhood. Our data allow us to make several methodological improvements over prior studies that reduce the likelihood of selection bias. Preliminary results suggest that properties near recent foreclosure starts do sell at a discount and the size of the discount increases with the number of recent foreclosure starts. The magnitude of the effects varies considerably across neighborhoods, suggesting that results from a single housing market should not be extrapolated to predict impacts in other markets.

Edward Coulson* (Penn State University), Lynn Fisher (MIT)

Structure and Tenure

Homeownership is highly correlated with single family detached houses and renting with multi-household structures. We delineate four distinct, yet potentially overlapping theories to explain this correlation: size, agency, control, and history. Size refers to the fact that for tax purposes ownership is more advantageous for larger units, and single family units are larger than multi-units. The agency explanation (Glaeser and Shapiro, 2003) notes that maintenance issues arise at the building level, not at the unit level. Cooperation among owners in the building can be difficult, and so central coordination by a landlord may be optimal in a multi-household setting. Control simply refers to the fact that the advantages to ownership are greater when there is more to control, and that will be the case when, for example, ownership includes control over land, as in single family units. Explanations rooted in history hypothesize that city cores were largely given over (even zoned that way) for multi-family structures. With age comes a lemons problem which prevents their conversion to ownership properties.
We attempt to distinguish among these theories through a series of tests, in the main involving comparisons within structure types. For example, the size theory seems to gain empirical support from the fact that within single family units, smaller houses are more likely to be rental properties. Preliminary results indicate that all four theories have some merit.

Grace Wong* (Wharton School), Grace Wong ()

The American Dream? The Joy, Pain and Externalities of Homeownership

Using a unique data set that links up well-being and housing consumption, this paper sets out to measure systematic differences between homeowners and renters, in term of moment-to-moment emotions, life satisfaction, joy and pain derived from domains of life including home and neighbourhood, family life and importantly, time use. A remarkable similarity between homeowners and renters is found in terms of life and home-related satisfaction. In fact, they report to derive more pain from their home and house, and also their neighborhoods. They tend to be less healthy, spend less time with friends and on active leisure, and also experience less positive affect during time spent with friends. Their time use patterns reveal little evidence of them being "better citizens" or more engaged in their family or social lives. Due to self-selection in the housing tenure choice, these results are likely to represent upper bounds of the causal benefits of homeownership. Homeowners who live in ZIP code areas with higher rates of homeownership report more positive attitudes only if other owners are similar to them in socio-economic terms, lending some support to the idea of beneficial social interaction among owners.

Session A02. Land Use I

Christopher Cunningham* (Federal Reserve Bank of Atlanta)

Estimating the holdout problem in land assembly

The Supreme Court’s recent decision in Kelo vs. New London allowed the use of eminent domain to facilitate private economic development. While the Court’s condition for allowing takings was highly expansive, there may be a market failure that warrants state intervention when parcels of land need to be combined for redevelopment. The collective action or strategic holdout problem associated with land assembly may limit redevelopment of older communities when one or more existing owners seek to capture a disproportionate share of the potential surplus. The problem may be compounded by land owners’ uncertainty as to the true value of the expected surplus to be divided (Eckart, 1985; Strange, 1994). At the same time, developers may attempt to disguise the assemblage through the use of straw purchasers. This paper employs administrative GIS and assessor data from the Seattle, Washington to identify lots that were ultimately assembled and matches them to their pre-assembly sales. Controlling for lot and existing structure characteristics and census tract-year fixed effects, I find that land bought in the process of a successful assembly commands a substantial premium. Consistent with theory this premium falls with a parcel’s relative size in the assemblage. Finally, I find some evidence that parcels toward the center of the development may command a larger premium than those at the edge, suggesting that developers retain or are perceived to retain some design flexibility.

Junichi Suzuki* (University of Toronto (From July 1st, 2008))

Land Use Regulation as a Barrier to Entry -Evidence from the Texas Lodging Industry-

In the U.S., local governments regulate private land use mainly through zoning. By creating a barrier to entry and lessening competition in local business markets, their regulation has the potential to generate a distortion. This paper assesses the empirical relevance of this hypothesis using microdata on midscale Texas chain hotels and land use regulation data collected from their local municipalities. I construct a static entry model of midscale hotel chains. By endogenizing their entry decisions, the model explicitly considers hotel chains’ reactions to the stringency of land use regulation. Reduced form regressions indicate that local markets under stringent regulation tend to undergo fewer entries. To identify the extent to which high entry cost due to stringent land use regulation explains this negative correlation, I estimate structural parameters of the entry model by using a recently developed nested pseudo likelihood algorithm. To verify the robustness of my results, I also employ a bound estimator that is consistent under weak conditions. Estimation results indicate that imposing stringent regulation increases cost enough to affect hotel chains’ entry decisions. A decrease in the total surplus is larger than the cost increase since the lessened competition generates an extra distortion. Although they are the immediate payers of the increased entry cost, incumbents shift about the half of their cost increase onto consumers by exploiting their increased market power.

The composition and quality of newly constructed housing affect the character and possibly the future prospects of locations for decades. Yet surprisingly little is known about their determinants. Exploiting SMSA-level American Housing Survey (AHS) data from 1984 to 2004, we develop various indicators that capture the nature of new housing supply and relate these to economic conditions in the SMSA at the time when the units were built. Controlling for national trends and time-invariant local heterogeneity, we find that one year lagged income per capita has a strong positive effect on the share of multifamily housing and a negative effect on the square footage of newly built units. These effects are confined to SMSAs where land use regulation is relatively lax and they are stronger in city centers than in suburbs. Income is not statistically significantly related to various attributes of newly built single-family housing. Our results appear to reflect both the substitution of capital for land predicted by the standard urban economic model and the specific housing needs of intercity migrants that are attracted by local economic prosperity.

Rachel Meltzer* (New York University), Jenny Schuetz (City College of New York)

The Most Popular Kid in the Class: Diffusion of Inclusionary Zoning across San Francisco Bay Area Governments

Local governments can choose from among a wide array of tools to address most policy issues, and the effectiveness of a policy will vary based on circumstances of time and location. Thus the widespread emergence of one particular tool raises the question: why do some policies become especially popular? One example of a rapidly spreading trend is local inclusionary zoning (IZ) programs, which require developers to make a certain percentage of the units within their market-rate residential developments affordable to low- or moderate-income households. The policies are controversial: critics warn that IZ may constrain production and increase prices, but advocates believe that any negative effects can be mitigated through cost offsets and are justified by the need for affordable housing. Communities in the San Francisco Bay Area have been particularly enthusiastic adopters of IZ; by 2007, 68 percent of jurisdictions in the Bay Area had adopted some type of policy. In this paper, we test the relative importance of various hypotheses that could explain the rapid diffusion of IZ, using a unique dataset that includes the adoption dates and characteristics of IZ programs, indicators of partisan political affiliation and preferences over a range of related policies, as well as demographic, economic, geographic and housing stock characteristics for 114 counties, cities and towns in the Bay Area. Descriptive statistics suggest that partisan affiliation and government capacity are stronger predictors of IZ adoption than traditional indicators of housing demand; further analysis will provide more rigorous tests of these findings.

Session A03. Land Use II

Jeffrey Zax* (University of Colorado at Boulder)

Housing allocations and inequality in early and mid-reform urban China

This paper demonstrates that subsidized housing substantially increased inequality among urban Chinese residents in 1988 and 1995. Regressions for 1995 rental units impute estimated market rents in 1988 and 1995 for all dwellings. In both years, these imputed values exceeded actual rents by a factor of more than ten. Estimated true household income, the sum of imputed net estimated market rent and total reported income, exceeded the latter by approximately 23% in 1995. The best estimate of the Gini coefficient for true household income in 1988 is .250, 21.3% greater than the coefficient of .206 for total reported income. The best estimate for 1995 is .310, 11.1% greater than the reported value of .279.

We estimate the effects of land use regulation on the value of
residential land. While the effect of land use regulation on land
prices is already the subject of a large literature, previous
estimates are subject to at least one of three problems. The most
important of these is that many of the same factors which
determine land use regulation also determine land price. It
follows that regulation is an endogenous variable in the widely
used hedonic regression predicting price as a function of
regulation. The second of these problems is that land use
regulation should be expected to impose costs on each regulated
parcel, but may thereby provide external benefits to neighboring
parcels. The literature does not appear to have recognized the two
competing effects and they have not been estimated separately. The
third problem is that the proper metric with which to measure the
welfare effects of regulation is aggregate land rent, not housing
prices. However, most extant analyses are based on data describing
housing prices. We employ a new data set and a novel
identification strategy to deal with these problems.

Thoma s Davidoff* (UC Berkeley)

Location heterogeneity and land rents

Differences in prices across markets have been the topic of contentious academic and popular debate. This paper offers a link between land rent gradients and the levels and growth of land rents and prices. Markets with flat land rent gradients have effectively elastic land supply, whereas markets with steep gradients have effectively inelastic supply. Thus, where land rents are highly differentiated across locations, we expect to see high levels of land rents and growth in housing prices over time. I test this idea using data from Internet listed hotel prices. Using different definitions of a gradient, I show that average hotel prices are associated with land rent gradients. I then show that locational hotel price gradients are associated with high growth in housing prices.

Jed Kolko* (Public Policy Institute of California)

Topography, Regulation, and Housing Supply

Previous research has found that regulation lowers the elasticity of housing supply. This literature, however, has either omitted or, at best, roughly approximated measures of topographic constraints. This paper generates precise and comprehensive topographic measures using Geographic Information System (GIS) software for 200 metropolitan areas. These measures reflect the share of coastal water, inland water, steep land, and flat land within 50 miles of a metropolitan center. With these measures, I estimate the effects of topographic constraints and regulation on housing supply elasticity.
My main finding is that topographically constrained metropolitan areas exhibit less elastic housing supply. Areas with more regulation also exhibit less elastic housing supply, but the standardized coefficient of the topography variable is larger than that of the regulation variable. Furthermore, I show that areas with more stringent regulation are also more topographically constrained. The inclusion of my topography measures lowers the effect of regulation on housing supply elasticity by one-third to one-half. Thus, previous work on regulation that omitted or only roughly approximated topographic measures has overstated the effect of regulation on housing supply elasticity.

An Empirical Regularities between Industrial Location and City Sizes across Economic Regions

Despite seemingly disorderly spatial intensities of both industries and population across space, Mori, Nishikimi and Smith (JRS2008,1) have provided evidence for strighking empirical regularities designated as Number-Average Size (NAS) Rule connecting industrial location behavior, industrial diversities of cities, and population size of cities for the case of Japan. This paper explores this regularity at the subregional levels within Japan, by identifying a subregion in terms of the transport hinterland of each city. In particular, we show that while the similar NAS Rule holds for a suffciently large such "economic" sub-region, it does not for small sub-regions, or for randomly aggregated sub-regions.

Measures and Models of the Structure and Evolution of Employment in Cities

This paper makes three contributions to our understanding of urban spatial structure. First, at a descriptive level, we use geographic information systems software and a unique spatially disaggregated data set on employment by place-of-work to map the intraurban spatial distributions of employment in several US cities for 1990, 2000 and 2007. The employment data is disaggregated to census tract and block group, and comes from Journey-to-Work data and tabulations of infoUSA business data. This visual analysis will show levels and changes in the distribution of total employment and employment in individual sectors, e.g., manufacturing, finance and insurance, wholesale trade, legal services, and food stores. Second, we use spatial statistics to analyze the centrality, compactness and clustering of employment, focusing on variations across sectors and changes over time. Third, we will use simulations to relate these measures of spatial structure to economic models of employment location, including static monocentric models, dynamic models with durable capital, non-monocentric models of spatial interaction, and models of subcenter and edge city formation. The overall goal of this research is to evaluate the degree to which the structure and evolution of employment in cities is consistent with existing economic models of employment location.

Patterns of Localisation in the French Manufacturing and Service Industries: a Distance-Based Approach

We explore the patterns of localisation in the French manufacturing and service industries using the distance-based approach developed by Duranton and Overman (2005). Relying on the same industrial classification as the one used by these authors, we show that their main conclusions remain valid in the case of French manufacturing industries. Furthermore, we find that service industries deviate more often from randomness than manufacturing industries, and that a higher proportion of them show global localisation. This ocalisation occurs at shorter distances than for manufacturing industries. Finally, these patterns of localisation remain fairly stable over the period 1996-2005. Within industries, we find that exiters are
acting to reenforce localisation while entrants are acting in the opposite direction.

Octávio Figueiredo (Universidade do Porto and CEMPRE), Paulo Guimaraes (University of South Carolina and CEMPRE), Douglas Woodward* (University of South Carolina)

Vertical Disintegration in Marshallian Industrial Districts

This paper uses a novel measure and detailed plant-level Portuguese data to reexamine the Marshallian hypothesis that specialization and the vertical disintegration of firms should be greater in areas where an industry concentrates. Our measure of firm specialization and vertical disintegration employs a Herfindhal index constructed with occupational shares for all workers within the firm. Controlling for firm size and sector of activity, we find that vertical disintegration is around three percent higher in areas where industries agglomerate. Sensitivity tests reveal that this positive relation is remarkably robust across different specifications.

Labor Reallocation over the Business Cycle: New Evidence from Internal Migration

This paper establishes the cyclical properties of a novel measure of worker reallocation: long-distance migration rates within the US. This internal migration offers a bird’s eye view of worker reallocation in the economy as long-distance migrants often change jobs or employment status, altering the spatial allocation of labor. Using historical reports of the Current Population Survey (CPS), we examine gross migration patterns during the entire postwar era, a period that spans ten recessions over more than fifty years. We obtain additional evidence on inter-state and inter-metropolitan population flows during the past thirty years from statistics compiled by the Internal Revenue Service. We find that internal migration within the US is strongly procyclical in both sources. Even after accounting for variation in relative local economic conditions, migration is lower during downturns in the national economy. Using individual-level CPS data, we find that migration is procyclical for most major demographic and labor force groups, although it is strongest for younger workers. Our findings suggest that cyclical fluctuations in internal migration are driven by economy-wide changes in the net cost to worker reallocation with a major role for the job finding rate of young workers.

We explore the dual role of housing, as an investment vehicle and as access to a location. Our dynamic stochastic model has four classes of assets: a risk free bond, houses (in various locations), stocks, and human capital (with different productivity in different locations). Agents choose where they live and can invest in the financial market and in all real estate markets. Local rents are determined in equilibrium by the utility of the marginal residents, which in turn depends on city sizes, local labor productivities, and local shock-insulation parameters. The dividend of a house is a stochastic process that is determined endogenously by how local productivity shocks affect marginal residents. The model leads to a closed-form representation of: (i) The portfolio decisions of agents as a
combination of an investment in a financial and real estate mutual fund and demand in local housing to hedge the endogenous rent risk; and (ii) The returns of financial and real estate assets in terms of the covariance matrix of dividend shocks and local productivity shocks.

The Contribution of Higher-Risk Lending to the 2002-2008 Housing Cycle

Explanations for the housing boom and bust since 2002 have frequently pointed to changes in the price of credit and the accompanying rise and fall of higher-risk and/or non-traditional mortgages. However, borrowers and lenders are more likely to make and use such loans when expected future housing conditions are brighter. Thus, the true effect of cheaper access to credit on housing market fluctuations can not be determined from the simple correlation of the two. Using panel data on nearly all of the metropolitan areas in the United States, we examine the effect of changes in higher-risk lending on housing market outcomes using variation in the supply of credit based on two location-specific characteristics that, we argue, are unrelated to housing market activity: the market share of independent mortgage companies prior to the housing boom, and state anti-predatory lending laws passed prior to 2002. We measure the amount of higher-risk lending in each location using a loan-level default model to summarize a number of loan and borrower characteristics including loan-to-value ratios, debt-to-income ratios, undocumented borrower income or assets, credit scores, owner-occupancy, and mortgages with non-traditional amortization schedules. Unsurprisingly, higher-risk lending during the credit boom of 2002—2005 is correlated with our two credit supply shifters. Based on these shifters, we find that increased higher-risk lending led to both more-rapid house price appreciation and to greater residential construction from 2002 to 2005; the extreme curtailment of credit availability since early 2007 has also exacerbated the decline in prices and construction. Thus, the housing cycle does indeed appear to have been influenced by changes the supply of higher-risk loans. However, the magnitude of this effect does not explain the entire expansion and contraction of the housing market, suggesting that other factors have played important roles as well.

The growth rate of temporary help service employment is often considered to be a leading business cycle indicator because the firing and hiring of temporary help workers typically leads that of permanent workers. However, few studies in the literature focus on the mechanism that generates the lag between temporary and permanent growth. This paper investigates how firms extract signals of long-lived shocks from noisy transitory shocks and how this influences their hiring/firing decisions. Our simple model predicts that the average size of transitory demand shocks increases the lag while the average size of long-lived shocks shortens the lag. Our empirical findings, based on cross-city analysis, show evidence that supports the above predictions, after controlling for city size, city-specific demographic characteristics, and variables based on the industry co-movement in the city.

We assess whether borrowers know their mortgage terms by comparing the distributions of these variables in the household-reported 2001 Survey of Consumer Finances (SCF) to the distributions in lender-reported data. We also examine the characteristics of SCF respondents who report not knowing these contract terms. We find that most borrowers appear to know their basic mortgage terms. Adjustable-rate mortgage borrowers, though, appear likely to underestimate or not know how much their interest rates could change. Borrowers who are more likely to experience large payment changes relative to income in the event of interest rate increases are also more likely to report not knowing these contract terms. Difficulty gathering and processing financial information appears to be the most likely explanation for borrowers’ problems with these contract terms.

Like many other assets, housing prices are quite volatile relative to observable changes in fundamentals. But if we are going to understand boom-bust housing cycles, we must incorporate housing supply. In this paper, we present a simple model of housing bubbles which predicts that places with more elastic housing supply have fewer and shorter bubbles, with smaller price increases. However, the welfare consequences of bubbles may actually be higher in more elastic places because those places will overbuild more in response to a bubble. The data show that the price run-ups of the 1980s were almost exclusively experienced in more inelastic cities. More elastic places had slightly larger increases in building during that period. Over the past five year, a modest number of more elastic places also experienced large price booms, but as the model suggests, these booms seem to have been quite short, and prices are already moving back towards construction costs in those areas.

We study early default, defined as serious delinquency or foreclosure in the first year, among nonprime mortgages from the 2001 to 2007 vintages. After documenting a dramatic rise in such defaults and discussing their correlates, we examine two primary explanations: changes in underwriting standards that took place over this period, and changes in the economic environment. We find that while credit standards were important in determining the probability of an early default, changes in the economy – especially a sharp reversal in house price appreciation – after 2004 were the more critical factor in the increases in default rates that we observe. An important additional result is that even with a rich set of covariates, much of the increase remains unexplained, even in retrospect. Thus, the fact that the credit markets seemed surprised by the rate of early default in the 2006 and 2007 nonprime vintages becomes more understandable.

Millions of Americans have negative housing equity, meaning that the outstanding balance on their mortgage exceeds their home's current market value. Our data show that the overwhelming majority of these households will not lose their homes. Our finding is consistent with historical evidence: we examine more than 100,000 homeowners in Massachusetts who had negative equity during the early 1990s and find that fewer than 10 percent of these owners eventually lost their home to foreclosure. This result is also, contrary to popular belief, completely consistent with economic theory, which predicts that from the borrower's perspective, negative equity is a necessary but not a sufficient condition for foreclosure. Our findings imply that lenders and policymakers face a serious information problem in trying to help
borrowers with negative equity, because it is difficult to determine which borrowers actually require help in order to prevent the loss of their homes to foreclosure.

The Low-Income Housing Tax Credit (LIHTC) program has ballooned into the largest ever source of subsidized construction of low-income housing in the United States, accounting for one-third of all recent multi-family rental construction. Recent proposals in Congress have sought to double the size of the program. This paper examines the crowd out and stigma/amenity effects of this increasingly important source of low-income housing. To do so, we apply a unique geographic approach to the data as well as instrumental variable methods that facilitate identification.
Results indicate that within one-half mile, LIHTC development likely has a positive amenity effect in low-income areas but a negative stigma effect in high-income areas. These effects attenuate with distance. Expanding the geographic scope of the analysis to ten mile areas, one-third of LIHTC development is offset by crowd out of private unsubsidized rental housing construction. This is consistent with high levels of crowd out found in other markets (e.g. Berry and Waldfogel, 1999) and also for earlier forms of place-based subsidized housing (e.g. Murray, 1999; Sinai and Waldfogel, 2005). These patterns raise questions about the viability of the LIHTC program and should be taken into account when considering its expansion.

Using data compiled from concentrated residential urban revitalization programs implemented in Richmond, VA, between 1999 and 2004, we study residential externalities. Specifically, we provide evidence that in neighborhoods targeted by the programs, sites that did not directly benefit from capital improvements nevertheless experienced considerable increases in land value relative to similar sites in a control neighborhood. Within the targeted neighborhoods, increases in land value are consistent with externalities that fall exponentially with distance. In particular, we estimate that housing externalities decrease by half approximately every 990 feet. On average, land prices in neighborhoods targeted for revitalization rose by 2 to 5 percent at an annual rate above those in the control neighborhood. These increases translate into land value gains of between $2 and $6 per dollar invested in the program over a six-year period. We provide a simple theory that helps us interpret and estimate these effects

We use administrative data on personal bankruptcies from the Department of Justice to
study the extent of social spillovers in individual filings. At least two possible
mechanisms lead to the presence of local social spillovers: information sharing and the
reduction of social stigma associated with filing. We exploit law changes in several U.S.
states to estimate the magnitude and geographic extent of such spillovers, if any. The
results are mixed: in the early law change episodes we find some evidence of spillovers
in zipcodes close to the border with the state in which the change occurred. There is no
evidence of spillovers in the later episodes. The magnitude of the estimated spillovers
ranges between about 7% and 24% relative to the baseline filing rate.

This paper examines whether racial differences in the educational environment experienced within U.S. metropolitan areas can explain the well established relationship between residential segregation and African-American outcomes. The authors use the National Educational Longitudinal Study (NELS) to replicate earlier findings that greater residential segregation leads to lower relative test scores, educational attainment, and labor market success. As with previous studies, the authors find that school segregation cannot explain this phenomena. The authors will use the unique data in the NELS to test whether racial differences in exposure to school environmental factors, such as parental education, teacher experience, school attendance levels, classroom environments, teacher expectations, and student norms, can explain the influence of residential segregation on African-American outcomes.

The talent pool of the labor force in cities like New York City differs from that in a small
Midwestern town. We propose an equilibrium model with labor mobility, a production technology
with diversity, and consumer preferences over housing and consumption. When cities differ in local
TFP, in equilibrium they will have different sizes, and the distribution of skills across cities differs.
The more productive, larger cities attract the workers that are more skilled on average and the skill
distribution first-order stochastically dominates that of smaller cities. Our model predicts a “Sinatra
effect”: while the lowest skilled workers are everywhere, the highest skilled workers only locate in
the biggest cities. Wages and house prices in larger cities are higher. This is consistent with the data
on the skill distribution within cities.

David Cuberes* (Clemson University)

Sequential City Growth: Empirical Evidence

Using a comprehensive dataset on cities population for a large set of
countries in the period 1800-2000, I present three new empirical facts about the evolution of city growth. First, the distribution of cities growth rates is skewed to the right in most countries and decades. Second, the rank of the fastest growing cities in each decade tends to increase over time. Finally, this rank grows faster in periods of rapid urbanization. It is argued that these three observations can be easily rationalized with a simple urban growth model that predicts sequential city growth.

The Rise and Fall of Spatial Inequalities in France: a long-run perspective (1860-1930-2000)

This article uses a unique database that provides value-added,
employment, and population data for the entire set of French
departments for the years 1860, 1930, and 2000. These data cover
three industries: agriculture, manufacturing, and services. This
allows us to study the evolution of geographical disparities within
France over the past century, and to test the validity of economic
geography predictions with respect to the empirical data. Examining
how the concentration of industry and services has varied over time
suggests the existence of an underlying bell-curve: the 1860-1930
period is characterized by increasing concentration, whereas the
1930-2000 period exhibits gradual dispersion. On the other hand,
labor productivity across France's departments has been converging,
which suggests a move towards the equalization of wages across
space. Lastly, our study confirms the existence of strong
agglomeration forces during the full time-period under
consideration. Market potential accounts for the spatial
distribution of these gains during the first period (1860-1930),
while the level of human capital explains this distribution during
the second period (1930-2000).

Analysts of urban and regional growth differences in the US tend to assume full spatial equilibrium, with people unable to improve their welfare by moving from one place to another (Glaeser et al, 1995). Flows of people thus indicate changes in the distribution of spatial welfare – as people move to places offering superior opportunities or lifestyle - rather than differences in income levels or rates of growth of income. Research in Europe, however, shows that people tend to be quite immobile. Even mobility within countries is restricted compared to the US but national boundaries offer particular barriers to spatial adjustment. Thus it is unreasonable to assume inter regional or inter urban equilibrium in a European context and differences in per capita incomes are persistent and signal real spatial welfare differences. Furthermore, it implies that the drivers of what population movement there is, may differ from the drivers of spatial differences in productivity or output growth.
This paper reviews the evidence on the drivers of differential urban growth in the EU both in terms of population and output growth. The conclusion is that while climate differences within countries are significant influences on urban population growth, there is no apparent process of the European population ‘moving to the sun’. At least so far as the data allow, there is no evidence of a unified European urban system but rather of a set of national systems, with weak responses to variations in local economic opportunities. The most important factor in explaining urban growth differences is national growth differences although there is evidence that concentrations of human capital, agglomeration economies and systems of urban governances have significant effects. There is, moreover, a pattern of growth dynamics which shows a few rich city-regions pulling away and becoming richer relative to the rest.

Session A09. Systems of Cities II

Wen-Tai Hsu* (Chinese University of Hong Kong)

Central Place Theory and Zipf's Law

This paper provides a theory of the location of firms and, as cities are groups of firms, the emergence of cities. Using a model of equilibrium entry, this paper provides a microfoundation for central place theory and the conditions under which Zipf's law for cities emerges. Central place theory describes how a hierarchical city system with different layers of cities serving different sized market areas forms from a uniformly populated space. Zipf's law for cities, that is, the size distribution of cities following the Pareto distribution with a tail index close to 1, is a robust empirical regularity. In the model, the main force driving the size difference of cities is the tradeoff between transportation cost and scale economies, which differs across goods due to different fixed costs of production. Since a central place hierarchy also implies a hierarchy of firms, Zipf's law for firms is also approximated. The theory is also consistent with a newly discovered empirical regularity, the number-average-size rule, which is a log-linear relationship between the number of cities and the average size of cities where an industry is located.

Is the city in which you are living becoming more important for your welfare than the country in which you are living? We address this question from a systemic point of view. In so doing, we argue that, as international competition intensifies, the way the economic geography of a country is organized in terms of its urban system becomes a key determinant of its economic performance. The idea is that the changing needs of firms and households along respectively their product and work life cycles are best served by an urban system in which diversified and specialized cities coexist.
The product life cycle dimension has been already investigated by Duranton and Puga (2001). While building on their work, we study instead the worker’s life cycle dimension. In our model an individual lives two periods. In both periods she needs a land lot of fixed size for residential purposes. She is born with an innate talent in the city where her parent already lives. Her talent is drawn by some random distribution and the probability of inheriting the parent’s talent increases with the density of people with the same talent in her city of birth. The randomly assigned talent becomes known to the individual only by experimenting different tasks. There is a one-to-one relation between talents and tasks, so the individual discovers her own talent only after experimenting the corresponding task. Crucially, experimentation is a localized experience insofar as the individual is able to try only the tasks that someone else is already performing in her own city. Since there is a one-to-one relation between talents and tasks, diversified cities where more tasks are performed, give the individual a higher chance of discovering her own talent. If the individual does not discover her talent, she ends up performing a suboptimal task, which entails some productivity loss.
Experimentation is over at the end of the first period of the individual’s life cycle, which terminates with employment and production no matter whether the individual discovers her talent or not. In the second period of life the individual retires and gives birth to a individual of the next generation. She enjoys higher utility if the kid shares her same talent and can increase the probability of this event by locating in a specialized city where all people share the same talent. The rationale is the same underlying the benefits in terms of ‘identity’ transmission à la Bisin and Verdier (2001).
All this makes it makes it optimal from the economy’s point of view to provide an urban system in which diversified and specialized cities coexist so that individuals are able to locate in a diversified city at the early stage of their life cycle, when they try to discover their talents and then work, and to locate in a specialized city at the later stage of the life cycle, when experimentation is not an issue anymore and the toll claimed by urban diversity in terms of higher costs of talent transmission becomes dominant. Congestion in the land market ensures the existence of such an equilibrium.

Yannis Ioannides* (Department of Economics, Tufts University)

Intercity Trade and Convergent vs. Divergent Urban Growth

The paper studies intercity trade and growth in an
overlapping-generations economy where tradeable goods are produced
using a composite of capital, raw labor and intermediates, and are
combined in each city to produce a composite. The composite is used
for consumption and investment. Tax-financed investment that
affects commuting costs endogenizes city size. A combination of weak
(strong) diminishing returns and strong (weak) market size effects
can lead to increasing (decreasing) returns to scale. Autarkic
urban growth may be parallel or divergent. Capital growth in the
integrated economy has the same dynamic properties as its
counterpart for an economy with autarkic cities but leads to
national constant returns to scale.

Kristian Behrens* (University of Quebec at Montreal), Frédéric Robert-Nicoud (London School of Economics)

Survival of the fittest in an urban environment: Agglomeration, selection and polarisation

Cities are places of phenomenal wealth creation: in any cross-section of cities, the elasticity of worker and firm productivity with respect to city size is positive and typically in the 3%-8% range. Empirically, this is so because the most efficient firms and the most skilled workers self-select into large cities, which then make them even more productive via agglomeration economies. Cities are also polarised: income inequalities are typically
increasing in the size of urban agglomerations, at least in the U.S. This paper provides a model of vertical differentiation of cities to account for such facts simultaneously. It also unveils a set of stylised facts that are consistent with the equilibrium conditions of our model and the data. Finally, we use our theoretical framework to shed light on phenomenae such as urbanisation and city resilience.

Session A10. Mobility and Worker Flows

Giovanni Peri* (UC Davis)

Immigration Accounting in U.S. States: 1960-2006

Different U.S. states have been affected by immigration to very different extents in recent years. Some state have received millions of immigrants while other have barely experienced a positive net inflow. Immigration increases available workers in a state economy and, because of its composition across education groups, it also increases the supply of workers with high school degree or less relative to those with some college or more. However immigration is more than a simple labor supply shock. Due to their skills, to the fact that they bring more competition on the labor market and may induce more efficient specialization or choice of techniques immigrants may also affect investments, capital accumulation, and productivity of more and less educated. Using a production-function based accounting procedure and data on gross state product, physical capital and hours worked we analyze the impact of immigration on value added per worker, capital per worker and productivity of more and less educated over the period 1960-2006 for 50 U.S. states plus D.C. To identify a causal impact we use the part of immigration that is determined by supply shifts in countries of origin and geographical location of U.S. states. We find that immigration significantly increased the relative supply of less educated workers, that it did not affect much the level of capital per worker and that it significantly increased productivity of both more and less educated. These effects together explain the small effect of immigrants on wages of less educated and the significant positive effects on wages of more educated.

This paper reexamines the co-location hypothesis of Costa and Kahn using data from the U.S. Census. Recently, Compton and Pollack tested the co-location hypothesis using data from the Panel Survey of Income Dynamics (PSID). They found no support for the co-location hypothesis. Their analysis suggested that only the education of the husband and not the joint educational profile of the couple affects the propensity to migrate to large metropolitan areas. They conclude that Costa and Kahn's findings are better explained by higher rates of power couple formation in large metropolitan areas. We analyze migration patterns using U.S. Census data for the year 1980. We find that the probability of migration is significantly higher for power couples than for husband or wife-only power couples, but husband's college degree has a larger impact than wife's college degree. In contrast to Compton and Pollack, we find that (1) power couples are more likely to move to large CMSAs than male half-power couples and (2) wife-only power couples are significantly more likely to move to a large CMSA than no-power couples.

Janice Madden* (University of Pennsylvania)

Status Caste Exchange: Preferences for Race and Poverty in Large Metropolitan Areas, 1970-2000

This paper examines the joint effects of race and income on racial segregation using consistently-bounded census tract data for 36 large metropolitan areas from 1970 to 2000 and offers an explanation for the surprising decrease in income segregation between 1990 and 2000. A fixed effect model analyzes how a census tract’s end of the decade proportions of the metropolitan population in each race and poverty status group are affected by the proportions of all other race and poverty status groups resident in a census tract at the start of the decade, the rate of change in those proportions over the decade, and other census tract characteristics that change between 1970 and 2000. For Northeastern and Midwestern MAs, with the greatest levels of racial segregation in the nation, racial integration occurs consistent with status caste exchange. Status caste exchange theory proposes that households are more willing to tolerate a neighbor of a lower racial “caste” if that neighbor is of higher socioeconomic status. In the Northeast and Midwest, nonpoor African Americans and poor non African Americans are shifting to the same neighborhoods. Therefore, racial integration of higher income African Americans into lower income white neighborhoods contributed to the decline in income segregation in the last decade.

A surprising but robust characteristic of workers' migration patterns across locations (states and metropolitan areas) within the U.S. is the positive correlation between inflow and outflow rates. This pattern cannot be accounted for by standard equilibrium models of employment reallocation across geographic areas in which net and gross flows of workers coincide. Further, micro-level evidence shows that inflows and outflows of workers tend to simultaneously occur within narrowly defined demographic groups, suggesting that the positive inflow-outflow correlation is not the symptom of a changing demographic composition of employment across locations. This paper develops and estimates a dynamic general equilibrium model of gross and net migration flows to explain this pattern. Due to a selection effect, workers migrating into a location have a higher propensity to migrate again than workers already living there. Thus, U.S. states that absorb large numbers of internal migrants also tend to display relatively large outflow rates. The time-series pattern of inflow and outflow rates across states is consistent with this interpretation.

Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials?

Low corporate taxes can help attract new firms. This is the main mechanism underpinning the standard race-to-the-bottom view of tax competition. A recent theoretical literature has qualified this view by formalizing the argument that agglomeration forces can reduce firms' sensitivity to tax differentials across locations. We test this proposition using data on &#133;rm startups across Swiss municipalities. We find that, on average, high corporate income taxes do deter new firms, but that this relationship is significantly weaker in the most spatially concentrated sectors. Location choices of firms in sectors with an agglomeration intensity at the twentieth percentile of the sample distribution are estimated to be twice as responsive to a given difference in local corporate tax burdens
as firms in sectors with an agglomeration intensity at the eightieth percentile. Hence, our analysis confirms the theoretical prediction: agglomeration economies can neutralize the impact of tax differentials on firms'location choices.

This paper provides empirical evidence on the impact of local taxation on property prices in two French urban areas: Dijon and Besançon, using data on property taxation and real estate transactions over the period 1994-2004. Our empirical methodology pairs transactions in the same spatial environment to estimate the impact of property taxation, controlling the local public spending effect. Spatial differencing and IV method allow us to compare sales across municipalities boundaries and to control for the endogeneity of local taxation and public spending. Our estimation results suggest that local property taxation has the expected negative impact on property prices. They show that more than the tax rate, the amount of taxes paid is important.

Alex Anas* (State University of New York at Buffalo), David Pines (Tel-Aviv University)

The Optimal Spatial Structure of the Property Tax

This article is concerned with the application of property tax to urban residential buildings. The revenue from this tax finances an important part of local public goods (LPG, hereafter) provisions in local governments. The property tax distorts resource allocation through time (e.g. Arnott and Petrova (2002)) and space (e.g. Brueckner and Kim (2003), Bento et al. (2006)).
Various reforms of the tax structure have been experimented with in the United States and elsewhere to adjust the tax in the spirit of the Henry George rule, such that the tax rate on the land component of the real estate will be increased at the expense of the rate on the improvements on land (such a split-rate or graded property tax is employed in 20 Pennsylvania cities , although Pittsburgh has more recently shifted back towards a single rate tax). Elsewhere, in the United Kingdom, a reform in the same spirit has already been implemented, where the poll tax partly replaced the property tax (the poll tax is as non-distortive as the Henry George tax is when dynamic effects are ignored).
Reforms that rely more on the land component of the property tax, however, have not remain unchallenged. Mills (1998), for example, favors the pure land tax on theoretical grounds, but believes that land taxation is infeasible in practice and may lead to more, not less, distortion in resource allocation in comparison with the conventional single-rate tax. Whatever the reforms in the property tax that are considered or even implemented, we believe that this tax will still prevail for a long time as the main source for financing LPGs in some levels of local governments. We, therefore, think that the structure of the property tax itself is a matter of continuing concern both theoretically and empirically.
In the relevant literature that we are aware of, the property tax is portrayed as an ad-valorem tax applied uniformly over space inside the local jurisdiction that employs the tax. This uniformity motivates us to explore what is the intra-city (second-best) optimal spatial structure of the property tax, on what this depends, and the effects of this relative to a common uniform rate structure, on the one hand, and first-best financing, on the other.
To that end, we construct a simple general equilibrium model of a closed urban economy with a fixed population and a system of open cities (that is, with costless migration between cities), as in Anas and Pines (2008). In order to construct such a model, we have to define the centrifugal and centripetal forces that allow the endogenous formation of cities with some finite given population mass for the entire system of cities. These two forces have received diverse but equivalent explanations in the relevant literature (see Abdel-Rahman and Anas (2004) for a survey).
The centripetal force in Stiglitz’ (1977) LPG model is the advantage to size of a low per-capita burden in LPG provision, while the centrifugal force is production that exhibits scale diseconomies due to a fixed supply of land. In a typical urban model, the centripetal force is often also depicted as production that exhibits scale economies, such as those arising from information exchange among agents in the same city or those arising from the taste for a variety of products to consume, or a technological bias for a variety of inputs in production. The centrifugal force is often depicted as the per-capita commuting cost required to accommodate the urban population and which increases with population, given a level of utility (see Fujita (1988) ).
In order to simplify the analysis in our city system model, we borrow the centripetal force from Stiglitz (1977) and the centrifugal force from Fujita (1988). Using this urban setup, we first reproduce the well-known result that the optimal finance of the LPG is based on the Henry George rule. In the present case, this rule can be interpreted in two ways. The first is that of imposing a 100% tax on aggregate differential land rent ( , hereafter), that is a 100% tax on profits from urban land transactions. The second is a poll tax at a rate of where is the optimal population city size and in this case is evaluated at the (second-best) optimal population size.
Then, we turn to using property tax financing which typically takes the form of a uniform-rate tax on building and land value. Our main result is that a uniform rate can be justified but only in special cases. One such case occurs when the elasticity of substituting the composite good for land in the production of housing, and that for substituting the composite good for housing in households’ consumption are both unitary. If both elasticities are larger than 1 (smaller than unity) or one elasticity equals unity and the other is larger (smaller), then the property tax rate must increase (decrease) with distance from the center of each monocentric city.
Other issues we explore in this article are:
1. Comparison between three optimal allocations: (a) the first best financing based on the Henry George land tax or an equivalent head tax; (b) property tax financing when the property tax rate is allowed to vary optimally with distance from the center; and (c) property tax financing when the tax rate is constrained to be uniform with distance.
2. The combined effect of the property tax and zoning the aggregate land size of the suburbs, and the property tax in conjunction with zoning individual lot sizes in the core or in the suburbs.

Which communities should be afraid of mobility? The effects of agglomeration economies on the sensitivity of firm location to local taxes

This paper examines the effects of agglomeration economies (AE) on the sensitivity of firm location to tax differentials. An initial reading of the story suggests that, with AE, when a firm moves into a community attracted by a tax reduction, other firms may decide to move in as well. This suggests that AE increase the sensitivity of firm location to local taxes. However, a second version of the story reads that, if economic activities are highly concentrated in space, AE might offset any tax differential, hence suggesting a reduction in this sensitivity. This paper provides a theoretical model of intraregional firm location with Marshallian AE that is able to generate both hypotheses: AE increase (decrease) the effect of taxes when locations are (are not) of a similar size. We then use Spanish municipal data for the period 1995-2002 to test these hypotheses, analyzing the combined effect of local business taxes and Marshallian AE on the intraregional location of employment. In line with the theory, a municipality with stronger AE experiences lower (higher) tax effects if it is sufficiently dissimilar (similar) to its neighbors in terms of size.

This paper develops an equilibrium sorting model wherein perfectly mobile agents decide their optimal residential locations. Our local economy features two cities, a clean city and a dirty city in which production factories are located. In contrast with previous studies of economic stratification, equilibrium configurations in our framework depend crucially on environmental considerations. While residents in a dirty city suffer a higher level of pollution, they incur less commuting cost to work. When workers of different abilities choose different locations to reside, a segregated spatial configuration emerges. In this stratified equilibrium, those residing in a clean city have higher working time, human capital and income than those in the dirty city. The higher the degree of pollution generated or the better the commuting technology, the larger the size of a clean city is. A location-biased pollution factor results in not only more aggregate pollution but also less economy-wide aggregate output. Additionally, our numerical exercises suggest that the welfare-maximizing local tax scheme requires a positive surcharge on residents in the clean city.

Marcus Berliant (Washington University in St. Louis), Chia-Ming Yu* (Washington University in St. Louis)

Rational Expectations in Urban Economics

Canonical analysis of the classical general equilibrium model
demonstrates the existence of an open and dense subset of
standard economies that possess fully-revealing rational
expectations equilibria. This paper shows that the analogous
result is not true in urban economies. An open set of
economies where the rational expectations equilibria do not
fully reveal private information is found. When location-
specific random variables are independent or correlated, the
existence of rational expectations equilibrium, possibly not
fully revealing, is demonstrated under the standard assumption
in urban economics that bid rents can be ordered by relative
steepness. When correlated random variables are not location-specific, the existence of fully-revealing rational expectations
equilibria is proved with a generic assumption.

Alex Anas (State University of New York at Buffalo), Marcus Berliant* (Washington University in St. Louis)

The Commuting Game

We examine commuting in a game-theoretic setting with a continuum of commuters. Traffic speed is determined by link capacity and by local congestion at a time and place along a link, where local congestion at a time and place is endogenous. Cars can catch up with others and slow them down. After formulating a static model, where consumers choose only routes to work, and a dynamic model, where they also choose departure times, we describe and examine existence of Nash equilibrium in both models and show that they differ, so prior claims about equivalence of the two models are false. Optima are examined for both the static and dynamic models and found to be different from the equilibria. For the dynamic model, optima can only be found numerically. Finally, it is shown via the folk theorem that for sufficiently large discount factors the repeated dynamic model has as equilibrium any payoff that is achievable in the one shot game with choice of departure times. More realistically, we examine Nash equilibria of the repeated commuting game when consumers are more myopic, but not completely so.

Session B03. Urban Theory II

Robert Helsley* (University of British Columbia), William Strange (University of Toronto)

Entrepreneurs and Cities: Balance, Thickness, and Complexity

It is well established that the thickness of large cities' markets can enhance entrepreneurial activity (Vernon (1960), Helsley and Strange (2002)). It has been more recently established that because they carry out so many different tasks, a balance of skills may be beneficial to an entrepreneur (Lazear (2005)). This paper unifies these approaches to agglomeration and entrepreneurship. It breaks from both by focusing directly on the timeliness of entrepreneurial activity rather than on abstract monetary adjustment costs that are reduced by urban thickness or by entrepreneur balance. The paper's model of multidimensional task completion generates several interesting results. First, agglomeration economies arising from market thickness are reflected in shorter completion times. Second, complex projects that are infeasible in small cities may be feasible in large cities, where adaptation costs and completion times are lower. Third, it may be possible for less balanced entrepreneurs to manage successfully in large cities by substituting local market thickness for balance. Finally, in the case of divisible projects, where entrepreneurs may allocate individual tasks to particular locations, there may be an incentive to match the duration of tasks to urban scale, and, in particular, to locate the most time extensive tasks in the largest cities.

In this paper we incorporate heterogeneous firms into a multi-region model in spirit of the “new economic geography”. Our model is based on a full-fledged general equilibrium framework with monopolistic competition where wages and markups are endogenous. Firms in our model randomly draw their productivity level from a known (Pareto) distribution, as in the influential papers by Melitz (2003) and Melitz/Ottaviano (2008). Workers are mobile across regions. Each region is subject to urban congestion costs.
We start the exposition with a short-run version of our model. For a given geographical distribution of labor and for given (iceberg) transport costs, we show that firm selection is tougher in the larger market. This translates into higher aggregate productivity, higher wages, lower markups and, thus, higher welfare in the larger region. In other words, Melitz-type firm selection reinforces the agglomeration force in our model, which is caused by a combination of increasing returns and transport costs. In the long-run, when the location of workers becomes endogenous, this agglomeration force is counteracted by urban congestion.
After having introduced the basic mechanisms, we turn to an empirical application. Using regional trade flow data between US states and Canadian provinces for the year 1993, we quantify the unknown parameters of our model and calibrate welfare levels in US/Canadian states/provinces for the given population distribution prevailing in that year. We then obtain the predicted regional migration flows from the model that would lead to utility equalization in the long-run, and we compare these predicted with the actual regional migration flows from the post-1993 period.
The principal contribution of our paper is, therefore, twofold. Firstly, we extend the theory of the “new economic geography” by addressing the basic trade-off between agglomeration and dispersion forces in a new type of monopolistic competition model with firm heterogeneity and selection. Secondly, we structurally estimate our framework and thereby provide a theory-based test of an important agglomeration force that has been overlooked in standard “new economic geography” models.

In this paper we build a quality-augmented
version of an economic geography model where
consumers have heterogenous tastes for a set of
manufacturing varieties. We discuss a footloose
capital model and a footloose entrepreneur model.
We show that firms selling the higher quality
goods select the region hosting the largest
number of consumers. Larger countries thus get
better access to the higher quality products. We
also show that the effect of spatial selection on
firms' spatial distribution crucially depends the
properties of the taste distribution across
varieties. Finally, we show that taste
heterogeneity smoothens the agglomeration
patterns but that it should be considered neither
as a dispersion force nor as an agglomeration
force. Indeed, the introduction of taste
heterogeneity makes an initially dispersed
economy less dispersed and an initially
agglomerated economy less agglomerated.

We study the intergenerational transmission of human capital using a dynamic model of sorting into communities and investment in education, in the presence of different economic and social effects. We emphasize the implications for social stratification and emergence of poverty traps via incentives to invest in human capital. The main question we investigate is: in an environment in which children's incentives to invest in human capital are affected by social interactions and parents care about the human capital of their children, what is the outcome of parents' deliberately using memberships to influence their choice? We use a random utility framework, so the model can be readily adapted to estimating the impact of social effects on investment and sorting.

According to economic theory, imbalances in trade flows affect transport prices, because transport prices in the high demand direction exceed those in the low demand direction in order to attract carriers to return to the high demand region without cargo. This implies that transport costs, and therefore trade costs, are fundamentally endogenous with respect to trade imbalances. We study this effect using transport prices for the inland waterway transport market in northwest Europe. We find that imbalances in trade flows have substantial effects on transport prices. We estimate that a one standard deviation increase in the trade imbalance between two regions decreases transport prices between these regions by about 10%.

This paper studies the role of land as a factor of production in a simple monopolistic competition model of trade and geography. Overall we find that land for production is a powerful dispersion force. More specifically, we show that, in contrast to the new trade literature, a larger country will have lower wages, in general. Moreover, allowing for labor mobility, we show that agglomeration is more likely to occur when the elasticity of substitution among varieties is small, hence, when the market power of firms is strong. In stark contrast to analyses where land is used for housing, only, the market equilibrium delivers excessive agglomeration in our model.

Trade costs are a crucial element of new economic geography (NEG) models, without trade costs geography does not matter. The level of trade costs influences the strength of inter-regional spatial dependencies and thereby the relevance of market access. The unavailability of actual trade costs data hampers empirical research in NEG and it requires the approximation of trade costs. Notwithstanding the importance of trade costs in NEG models, most empirical NEG studies do not pay a lot of attention to the ramifications of the particular trade costs specification used. This paper shows, both theoretically and empirically, that the way trade costs are specified matters. Estimations of an NEG wage equation for a sample of 80 countries show that the relevance of the key NEG variable, market access, and hence of spatial interdependencies hinges nontrivially upon the trade costs specification. The main conclusion is that NEG needs to (re-)examine the sensitivity of its empirical findings to the handling of trade costs.

Most FDI takes place between the developed countries, which suggests that the market-seeking motive is important for understanding FDI. However, given the stylized fact that trade barriers (e.g. transportation costs and financial barriers) have declined over the past 20 years, models that aim to explain market-seeking FDI tend to predict a decline in FDI. Neary (2008) offers two explanations for this puzzle: (1) the export platform motive (where firms gain access to an integrated market by investing in one of the “integrated” countries); (2) Neary’s (2007) GOLE model, which explains cross-border mergers and acquisitions (this model is of interest since most FDI comes in the form of M&As). By using a gravity framework, where we also deal with the “zero gravity problem”, we confirm the predictions of the GOLE model.

Past studies have provided only indirect evidence of the importance of consumer amenities for city growth. In this paper we introduce a new measure of the demand for urban amenities and urban variety that is based on revealed preference by consumers: the number of leisure tourist visits. Leisure tourists are attracted by an area’s special traits, such as proximity to the ocean, scenic views, history, architectural beauty, and cultural and recreational opportunities. But these are the same characteristics that attract households to cities when they are looking for a place to make their permanent home. We find that, all else equal, population and employment growth is about 2.5 percentage points higher in a metropolitan area with twice as many tourists. Housing prices also grow faster in “beautiful cities.” These results are of critical importance to a growing number of policymakers pursuing urban growth strategies based on historical conservation, city beautification, and the development of spaces for leisure and consumer-oriented “public goods.”

Jordan Rappaport* (Federal Feserve Bank of Kansas City)

Consumption Amenities and City Population Density

Population density varies widely among U.S. metro areas. A simple, static general equilibrium model demonstrates that moderate differences in metro areas' consumption amenities can cause extremely large differences in their population density. Such amenities are more strongly capitalized into housing prices than into wages. Empirical results suggest that amenities do indeed help to support high density levels and that amenities are becoming a more important determinant of where people choose to live. Matching the empirical correlation between wages and density requires that amenities cause approximately one fifth of the cross-sectional variation in metro population density.

This paper provides the first credible evidence on the economic value of the certification of “green buildings” in the commercial sector -- value derived from impersonal market transactions rather than engineering estimates. We match publicly available information on the addresses of Energy-Star and LEED-rated office buildings to a commercial data source detailing the characteristics of U.S. office buildings and their rental rates. We analyze the micro data on 694 certified green buildings and on 7489 other office buildings located within a quarter mile of the certified buildings. We find systematic evidence that rents for green offices are about two percent higher than rents for comparable buildings located nearby. Effective rents, i.e., rents adjusted for the occupancy levels in office buildings, are about six percent higher in green buildings than in comparable office buildings nearby. At prevailing capitalization rates, conversion of the average non-green building to an equivalent green building would add more than $5 million in market value. These results are robust to the statistical models employed.

SKILL-BIASED AGGLOMERATION EFFECTS AND AMENITIES: THEORY WITH AN APPLICATION TO ITALIAN CITIES

We provide a spatial equilibrium model with skill heterogeneity and then bring the model to data on workers living in Italian cities. Theoretically, we postulate that agglomeration to affect both production and consumption. Moreover, we allow the evaluation of urban amenities to vary across skill-groups. Empirically, we find evidence of a substantial urban rent premium, while we fail to find support for the urban wage premium. These results apply more dramatically to high-educated individuals, who care about the consumption effects of agglomeration disproportionately more than their less-educated counterparts. We show that urban skilled workers benefit from jobs of higher quality (better working environment; higher consideration received by others) and valuate amenities more (local public goods, such as transportation, health and schooling services; shopping possibilities, and the cultural consumption potentials made possible by the location of cinemas, theaters, and museums).

Session B06. Spatial Policy Analysis

Maria Ferreyra* (Carnegie Mellon University)

An Empirical Framework for Large-Scale Policy Analysis, with an Application to School Finance Reform in Michigan

In this paper I develop an empirical framework for the analysis of large-scale policies, and apply it to study the effects of school finance reform on the Detroit metropolitan area. Exploiting the school finance reform in Michigan 1994, I estimate a general equilibrium model of multiple jurisdictions with 1990 data from Detroit, predict the 2000 equilibrium, and compare this prediction with 2000 data to validate the model. I conduct counterfactual simulations using the estimates. According to my analysis, revenue-based reforms that ensure spending equity or adequacy have little impact on household demographics or school quality in Detroit.

Do unemployed workers benefit from entreprise zones? Evidence from France

In this paper, we study the effect of the French enterprise zones created in 1997 on finding a job in the Paris region. We exploit an exhaustive dataset of unemployment spells on the 1993-2003 period using a new methodology. Our approach consists in estimating some municipality effects using a Cox stratified model which allows to control for individual characteristics. This model is estimated by Stratified Partial Likelihood. We recover some municipality effects for each semester between 1993 and 2003. We then compare the growth over time of the average municipality effect been treated and non-treated municipalities.

Shawn Rohlin* (Syracuse University, Center for Policy Research)

State Minimum Wage Rates and the Location of New Business: Evidence from a Border Approach

This paper examines the degree to which changes in state minimum wage rates between 2005 and 2006 affect the state in which entrepreneurs choose to locate their businesses. Using GIS software, the analysis focuses on activity within one mile of state borders and utilizes two levels of differencing to identify effects, cross-border differences and differences between the two sample years. The analysis also allows for differences in impacts across different 1-digit industries. The multiple layers of differencing controls for unobserved area characteristics that would otherwise confound the impact of minimum wage rates. Controlling for unobserved factors has been a central challenge in previous research on the minimum wage, and has also hampered prior efforts to identify the impacts of local business policy on business location decisions.
Results indicate that an increase in the state minimum wage has a small negative impact on new business activity when pooling all industries together. Further analysis reveals substantial differences in the sensitivity to state minimum wage across one-digit industry groups: minimum wage effects are most pronounced in manufacturing and retail where a one percent increase in the minimum wage reduces new business activity by 5 percent and 8 percent, respectively. Results also indicate that sensitivity to the minimum wage increases with the degree to which an industry relies on workers with less than a high school education: the response of new business activity to a one dollar increase in the minimum wage is 7 percentage points higher among two-digit industries most reliant on low-skill workers as compared to industries that employ few workers with a limited education. Finally, for eating and drinking establishments -- an industry that has been the focus of several recent minimum wage studies -- a one dollar increase in the state minimum wage results in a 9 percent decrease in new business activity. These findings indicate that close to state borders, entrepreneurs are responsive to differences in the minimum wage changes, and especially so in industries that rely heavily on low-skilled workers.

The effect of industrial policy on corporate performance: Evidence from panel data

Industrial or business support policies designed to raise productivity and employment are a common feature of the policy landscape. Despite this ubiquity, rigorous micro-econometric evaluation of their causal effect is rare primarily because of the difficulty of achieving credible identification. In this paper we tackle this problem by exploiting multiple changes in the area-specific eligibility criteria for a major business support scheme in the UK (“Regional Selective Assistance”). These changes arose because of the need to comply with the European Commission revisions of the eligibility criteria and coverage rules. We match over twenty years of administrative panel data on program participation and firm performance from the Census Bureau to investigate the causal impact of the policy on employment, investment, productivity and entry/exit. Using an instrumental variable approach we find that the program has had a positive effect on both employment and investment, which naïve estimators underestimate. There is no statistically significant effect on total factor productivity, however. There is also some evidence that the program, by supporting less efficient enterprises, may slow down reallocation from less efficient plants, negatively affecting aggregate productivity growth.

Portage and path dependence: City formation and increasing returns in U.S. history

How much do initial conditions matter for the contemporary location of economic activity? Combined with population data from the decennial Censuses between 1790 and 2000, we examine the fall line, a geomorphologic feature along the Atlantic and Gulf coasts of the United States that lies where the Piedmont meets the coastal plain. In colonial times, the transport of goods
required portage and cartage around the falls at these points, while in the early industrial
revolution, the falls were a source of water power. These factors meant that centers of commerce and manufacturing formed where rivers intersected with the fall line. These original sources of productivity advantages have long since disappeared, and yet we show in this study that cities persist, to varying degrees, if these locations. We interpret these results in model in which we test for increasing returns to scale in local economic activity at various points in U.S. history.

We investigate the relationship between interstate highways and highway vehicle-miles travelled (VMT) in US cities. VMT increases proportionately to highways. We identify three important sources for this extra VMT: an increase in driving by current residents; an inflow of new residents; and an increase in transportation intensive production activity. The provision of bus-based public transportation has no impact on VMT. We also estimate the aggregate city level demand for VMT and find it to be very elastic. We conclude that an increased provision of roads or public transit is unlikely to relieve congestion, and that the current provision of roads exceeds the optimum given the absence of congestion pricing.

The Spatial Structure of Income in China: The Role of Economic Geography and Spatial Interactions

This paper contributes to the analysis of growing income inequality in China. We apply a structural model of economic geography to data on per capita income from 199 Chinese cities between 1995 and 2002, and evaluate the extent to which market proximity and spatial dependence can explain the growing income inequality between Chinese cities.
The econometric specification explicitly incorporates spatial dependence in the form of spatially-lagged per capita income. We show that the geography of market access and spatial dependence are significantly correlated with per capita income in China. Market access is particularly important in cities with smaller migration inflows, which is consistent with NEG theory, whereas spatially-lagged per capita income matters more in cities with greater immigration.
We conclude that the positive impact of spatially-lagged income partly results from labor mobility between neighbors, so that spatial dependence reflects the influence of migration, knowledge transfers and increasing competition between cities.

In classical traffic flow analysis, there are two velocities associated with a given level of traffic flow. Following Vickrey, economists have termed travel at the higher speed congested travel and at the lower speed hypercongested travel. There has been a debate in the economics literature for over thirty years concerning whether a steady-state hypercongested equilibrium can be stable. For a particular structural model of downtown traffic flow and parking, this paper demonstrates that a steady-state hypercongested equilibrium can be dynamically stable.

Session B08. Empirical Analysis of Agglomeration I

Satyajit Chatterjee* (Federal Reserve Bank of Philadelphia)

A Quantitative Assessment of the Role of Agglomeration in the Spatial Concentration of U.S. Employment

This paper seeks to quantify the contribution of agglomeration economies to the spatial concentration of U.S. employment. A spatial macroeconomic model with heterogeneous localities and agglomeration economies is developed and calibrated to U.S. data on the spatial distribution of employment. The model is used to answer the question: By how much would the spatial concentration of employment decline if agglomeration economies were counterfactually suppressed? For the most plausible calibration, the answer is about 48 percent. More generally, the general equilibrium contribution of agglomeration
economies appears to be substantial, with empirically defensible calibrations yielding estimates between 40 and 60 percent.

Productivity and Employment Density: New Estimates and Macroeconomic Implications

Using MSA-level panel data on wages and employment, we estimate the impact of employment density on wages with an identification strategy that is consistent with a general equilibrium model of the spatial allocation of production. We find that a doubling of density causes
the average productivity of labor to increase by between 17 and 28 percent. Our estimates are much higher than have been found previously, and we explain the difference within the context of our
equilibrium model. We show that changes to density account for more than 30 percent of the growth in real wages that have occurred over the past 35 years.

In 2000, annual earnings of full time full year workers were over 30 percent higher in metropolitan areas of over 2.5 million people than rural areas. This monotonic relationship is robust to controls for age, schooling and labor market experience. This paper is an attempt to decompose the city size wage gap into various components. We propose a labor market search model that incorporates endogenous migration between large and small cities. This model is sufficiently rich to allow for recovery of the underlying ability distributions of workers by city size, arrival rates of job offers by ability and location, and returns to experience by ability and location, when structurally estimated using longitudinal data. These estimates will facilitate a more complete empirical decomposition of the city size wage gap than is possible using results in existing research.

Can Competition and Selection Account for Observed Agglomeration Economies?

For years, urban economists have studied agglomeration economies. Many empirical studies of agglomeration are based on the premise that firms receive an external benefit to production from the lower search costs, lower transportation costs, or knowledge spillovers associated with co-location.
In this paper, we explore an alternative explanation for the observed presence of agglomeration economies. Namely, that the concentration of firms in a particular location, whether through greater competition or other factors specific to the local environment, creates a selection process whereby the least productive firms exit the market, generating a positive correlation between average productivity and firm concentration across locations that is independent of any agglomeration externality.
We use administrative microdata on nearly all establishments in U.S. metropolitan areas to test the relative importance of selection and exit versus location (and industry-location) specific effects on establishment wages and growth. In a model where agglomeration only has a purely external benefit, more concentrated locations should only have a rightward shift in the distribution of a given measure of establishment performance. In a model where selection effects dominate (whether they do so through greater competition or by other means), wages and growth should be higher through a lower-truncation of their distributions.
Earlier research (Syverson, 2004; Faberman, 2007) suggests that both a selection process and location-specific factors may be important for explaining the observed relationships between firm outcomes and agglomeration or urban growth. Further, standard models of firm learning (e.g., Jovanovic, 1982), where firms learn of their productive capacities by operating over time, imply that their growth, turnover and exit patterns will produce wage and growth distributions that are truncated from below. These models also imply that entry and growth (conditional on survival) within cohorts will depend on market-specific factors. Therefore, firm learning and selection will alter the composition of establishments as well as their entry and exit dynamics, and these patterns will vary systematically across geographic areas to the extent that location-specific factors affect the learning and selection process. In this paper, we test the extent to which these processes exist and whether they in fact vary systematically across metropolitan areas.

Economies of Density versus Natural Advantage: Crop Choice on the Back Forty

Economies of density exist when an expansion of an activity at one location lowers the marginal cost of the activity at nearby locations. In the standard concept of scale economies there is no notion of geography---cost savings are achieved by increasing scale at a particular point. With economies of density, geography is front and center. And the geography introduces a potential tension. Nearby locations are not necessarily homogeneous and can differ in the underlying suitability or natural advantage for a particular task. In such cases there may be a tradeoff between exploiting economies of density and exploiting natural advantage.
We examine this issue in a setting that illustrates this tradeoff in stark terms. Our setting is crop choice on a farm. Agriculture is the textbook case for the important role natural factors can play in the location of economic activity. Ricardo made famous the example of Portugal specializing in wine in its trade with England. The natural conditions for growing grapes are clearly better in Portugal than in England. It is well appreciated that natural conditions for farming vary across regions. Less appreciated is that natural conditions also vary at very narrow geographic scales. We will show that there can be appreciable differences in the soil quality between neighboring forty acre parcels of land.
Farming also makes for a good illustration of density economies. When a farmer plants a particular crop on a particular field, surely there are economies to be obtained when the farmer plants the same crop on an adjacent field. This enables the farmer to plant and harvest the crop as part of a single operation across both fields. Particular crops often involve specialized equipment. By planting both fields the same, the farmer can spread out the overhead for procuring the specialized equipment.
We quantify the importance of both factors, estimating the structural parameters of the model. We show the existence of density economies leads farmers to adopt policy rules such that what they plant on a particular field depends upon the soil characteristics of adjacent fields.
Our study makes use of interesting data. In 1815, the newly acquired lands of the young United States were, for the purpose of land sales, divided into a regular grid of one square mile units (640 acres) called sections. Sections in turn were subdivided by four into quarter sections (160 acres) which were subdivided again into quarter quarter sections of forty acres each. (The reader may be familiar with the terms "back forty," and "front forty," which refer to quarter quarters.)
We will show that this arbitrary grid drawn almost two hundred years ago continues to matter today. We use newly available satellite based data to determine crop choice at a very high level of geographic resolution. We combine the data on crop choice with detailed micro data on soil types.

Philippe Martin (Paris School of Economics), Thierry Mayer* (Paris School of Economics), Florian Mayneris (Paris School of Economics)

Agglomeration allows two quite different sorts of increasing returns: interactions among agents such as knowledge spillovers and a highly refined division of labor. A worker’s “soft skills” enhance the former, but the specialization allowed by thick agglomerated markets may make soft skills less necessary. This paper considers the role of soft skills in cities and industry clusters in light of the different natures of the two sorts of agglomeration economy.
The paper begins by specifying a model of the microfoundations of agglomeration economies where soft skills allow agents to interact more productively with each other. The model shows that soft skills will be more valuable in cities and industry clusters if agglomeration provides agents with more opportunities to interact fruitfully. On the other hand, to the extent that agglomeration produces thick, specialized markets that make interaction easier, it may be a substitute for soft skills. The net effect of soft skills is thus theoretically ambiguous. If the opportunity effect dominates, there should be higher levels of soft skills in large cities and clusters. If the specialization effect dominates, the reverse will hold.
In order to consider the role of soft skills empirically, the paper matches several measures of soft skills from the Dictionary of Occupational Titles to Census data to evaluate the soft skills – agglomeration relationship. The within-industry average level of soft skills is found to be higher in cities but not in centers of an industry’s activity. These results are consistent with the opportunity effect dominating for urbanization but not localization. Furthermore, large cities typically contain a disproportionate share of the industry’s workers with both very high and very low levels of soft skills, a result consistent with the presence of both opportunity and specialization effects. Thus, the paper shows that cities are not unambiguously centers of soft-skill enabled interaction. Industry clusters are even less so.

Session B10. Developing World Cities

Jan Brueckner* (UC Irvine), Harris Selod (Paris School of Economics)

A Theory of Urban Squatting and Land-Tenure Formalization in Developing Countries

This paper offers a new theoretical approach to urban squatting, reflecting the view that squatters and formal residents compete for land within a city. The key implication of this view is that squatters ``squeeze" the formal market, raising the price paid by formal residents. The squatter organizer, however, ensures that this squeezing is not too severe, since otherwise the formal price will rise to a level that invites eviction by landowners (defensive expenditures by squatter households also help to forestall eviction). Because eviction is thus absent in equilibrium, the model differs crucially from previous analytical frameworks, where eviction occurs with some probability. It also facilitates an analysis of squatter formalization policies in a general equilibrium context.

Stephen Sheppard* (Williams College)

Do Planning Policies Constrain the Growth of Urban Areas?

With present rates of growth in urban areas, particularly in cities of the Third World, the total amount of land in urban use is expected to double within the next 25 years. This rapid growth will present policy makers with a variety of challenges. Rapidly expanding urban areas or “sprawl” development is blamed for increased energy use and CO2 output, but whether increasingly urban populations generate greater environmental impacts than dispersed rural populations is at least subject to some doubt. Still, there is some evidence that for a given level of population and income, more compact cities result in less energy use per capita. Urban policy makers will face additional challenges balancing the pressure for compact urban development with the desire to provide “livable” cities that afford urban residents with access to open space. Finally, from the perspective of local policy makers, there is likely to be greater concern about the infrastructure costs associated with rapid urban growth. Expanding cities will impose tremendous burdens on developing countries to provide water, sanitation and roadways to service the expanded urban populations.
The usual policy response to such challenges is to develop some form of comprehensive and enforceable land use planning policy. Cities around the world have adopted a very wide variety of such policies, ranging from no planning whatsoever, through various types of zoning, to comprehensive planning systems that require detailed review of every change in land use or building. Each of these policies is in turn combined with a variety of different enforcement levels, from planning departments with no enforcement whatsoever to those that can (and do) compel demolition of structures that are not in compliance with local plans.
Do any of these policies make a difference?

Does urbanisation Affect rural poverty? Evidence from Indian Districts

Although the high rate of urbanization and the incidence of rural poverty are two distinctive
features of developing countries, we still do not know what the effects of the former on the
latter are. We address the issue by exploring the mechanisms through which urbanization may
alleviate rural poverty, disentangling “first round” effects, due to migration of rural poor to
cities, and “second round effects”, due to positive externalities of city growth on surrounding
rural areas. We test our theoretical predictions on a sample of Indian districts in the period
1981-1999, and we indeed find that urban growth has a substantial and systematic poverty
reducing effect in surrounding rural areas.

This paper uses a theoretical model to examine the causes of the rise in car use and the decline in bus use in developing countries. The empirical literature points to rising per capita income as a primary determinant of rising vehicle use, known as motorization. This analysis of commuter car/bus mode choice shows that while per capita income may be a good indicator for aggregate levels of motorization, other factors may drive motorization at the urban level. First, income inequality increases motorization at low levels of per capita income and reduces motorization at high levels of per capita income. Second, feedback between car use and congestion generates a cascade toward motorization at the urban level that increases travel time, squeezes out bus use, and reduces welfare. Third, congestion reduction policies implemented in urban areas, such as increasing road capacity, taxing car use, and reserving lanes for buses, reduce car use and improve welfare by maintaining bus service as an alternate travel mode.